Hardship - Buy-out Spouse Interest in Home (Divorce)

[Guest IRISH79]

Particpant in divorce proceedings. Has requested hardship distribution for purpose of buying out spouse's interest in their home. Participant claims he will loose the home if hardship not allowed. I am inclined to disallow; however, could this be construed as a distribution to prevent foreclosure on the mortgage?

[Slider]

At the 2004 Q&A between the IRS and the ABA, the following questions was posed. Although the answer is unofficial, it might help with your decision:

19. §401(k) – Hardship Distributions

A participant wants to know if the purchase of principal residence qualifies as a hardship if she is using the proceeds to 'buy out' the equity on her current home from her ex-spouse?

Proposed response: Yes, because the dwelling is her principal residence and she is purchasing an interest in it that she didn’t own before.

IRS response: The IRS agrees with the proposed answer. The participant is purchasing a part of her principal residence.

[Guest IRISH79]

Slider:

Thanks for reply and the citation.

[Guest Pensions in Paradise]

Before you allow the participant to take a hardship you may want to inquire about any pending QDRO's.

[wsp]

Before you allow the participant to take a hardship you may want to inquire about any pending QDRO's.

Now wouldn't THAT be something. Buy out the ex's interest in the home with money that he/she was to have received in a QDRO anyway.

[Guest TrustButVerify]

Hi Slider and all,

On this topic:

SCENARIO[/u]

A QDRO is pending with an award to an AP. The AP recipient has no home and would like to use the QDRO share of the 401k to fund part of home purchase. The AP is employed and currently rents because of insufficient capital for real estate purchase.

QUESTIONS

a) Is this a legitimate hardship distribution for the AP?

b) Does the AP have to keep the account with the Plan Administrator, or is there a benefit/detriment associated with rolling it over to an IRA

c) How much $ (max amt) from the AP's award could go towards the purchase of his home?

d) How soon after the AP receives the QDRO award in his own account (plan or IRA) must the home purchase be made?

e) Is this hardship contingent upon the AP needing the money for the down payment or wanting the money for the down payment,

f) is there a limit as a % of purchase price (or absolute $ amount) applicable to the AP's use of his QDRO award/account (Plan or IRA)?

g) can the AP use his rollover from the PP's cash-balance pension account? and can it be used with his award from PP's 401k?

I believe you've got the general line of inquiry. Thanks for your ideas.

TrustButVerify

At the 2004 Q&A between the IRS and the ABA, the following questions was posed. Although the answer is unofficial, it might help with your decision:

19. §401(k) – Hardship Distributions

A participant wants to know if the purchase of principal residence qualifies as a hardship if she is using the proceeds to 'buy out' the equity on her current home from her ex-spouse?

Proposed response: Yes, because the dwelling is her principal residence and she is purchasing an interest in it that she didn’t own before.

IRS response: The IRS agrees with the proposed answer. The participant is purchasing a part of her principal residence.